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SHAHZAD ANSAR
The partnerships tax advantages and disadvantages are similar to the proprietorship. Limited partnerships can provide unique tax advantages. Both the partnership and proprietorship have a legal identity distinct from the partners, but this identity is only for accounting purposes. The income is distributed based on the partnership agreement, and the owners then report their share as personal income.
S CORPORATIONS
The S Corporation combines the tax advantages of the partnership and the corporation. It is designed so that the venture income is declared as personal income on a pro rata basis. Shareholders benefit from all of the income and the deductions of the business.
S CORPORATIONS
The new law provides more flexibility to S Corporation with regard to: 1. Number of shareholders. 2. Who can be allowed to own shares? 3. The role of trusts as stockholders. 4. The ability of S corporations to own more than 90 percent of stock of another corporation. 5. Distribution of profits. 6. Issuance of different classes of stock. 7. Rules affecting the tax basis of incurred loses.
ADVANTAGES OF AN S CORPORATION
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Capital gains or losses are treated as personal income. Shareholders retain limited liability protection. It is not subject to a minimum tax, as C corporations are. Stock may be transferred to low-income-bracket family members. Stock may be voting or nonvoting. This form may use the cash method of accounting. Corporate long-term capital gains and losses are deductible by the shareholders.
DISADVANTAGES OF AN S CORPORATION
Even with the new regulations, there are still some restrictions. 2. If the corporation earns less than $100,000, then the C Corporation would have a lower tax liability. 3. The S Corporation may not deduct most fringe benefits for shareholders. 4. The S Corporation must adopt a calendar year for tax purposes. 5. Only one class of stock, common stock is permitted. 6. The net loss of the S Corporation is limited.
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A popular new entity is the limited liability company (LLC), which offers similar advantages as the S Corporation but with more liberal tax rules under subchapter K. This form is a partnership-corporation hybrid with the following characteristics: Where the corporation has shareholders, the LLC has members. No shares are issued, and each member owns an interest in the business. Liability does not extend beyond the members capital contribution. Members may transfer their interest only with the unanimous written consent of the remaining members. The standard acceptable term of an LLC is 30 years. The laws governing formation of the LLCs differ from state to state